Note Activity - Buying or Waiting or Getting Out?

Question

A quick review of a reputable notes for sale site shows 183 available single assets (Mortgages, CFD, Deed of Trusts) for sale. Total of 26 pending sales. Not included pools of notes which totaled I think 5.

Performing - 132 available where 19 are 2nd's / 21 pending sales (19 are 1st's)

Non-Performing - 51 available where 12 are 2nd's / 5 pending sales (2 are 1st's)

There appears to be some good notes available so are buyers in a waiting pattern? Is the current court backlog in getting FC done a factor?  Are they buying notes from other places other than the note sites?

How many notes have investors in this forum purchased in the past 60 days?

I've corresponded with a few from this site who have said they are getting out of notes due to the work and capital involved. Another has said that they haven't purchased due to a few PL going NPL and they are involved in working those out.

Curious what other's thoughts are.

Jamie Bateman · Answer

@Robert Harpster I believe there is still a gap in pricing expectations between buyers and sellers. I have seen a bit of an uptick in notes available in the last 2 months but I think there has been a bit of a stalemate. Sellers who don't need the liquidity have not been willing (in my experience) to come down to risk-adjusted expectations of buyers.

Don't get me wrong, transactions are still happening for sure, but I think we are several months away from seeing a true uptick in NPNs hitting the secondary market. Even then, I don't believe it will be anything like 2009-2011.

To answer one of your questions, yes, note investors have to develop many sources for acquiring notes. As much as I do like Paperstac, relying on one source to buy notes can be quite limiting. With the tightening of lending requirements, seller financing (creating notes) will probably be a popular option as well.

Good topic.

Alecia Bolton · Answer

@Andy Mirza Given the banks write-off bad debt, I wouldn't expect to see a lot of Covid defaulted paper until closer to the end of the year.  It'll definitely be interesting to see if there are any stipulations around what we can do with them.

Chris Seveney · Answer

@Jamie Bateman

As Andy mentioned, some of this paper may require a 12 month forbearance and during that time banks probably will not offload. If they do, it typically takes several months for a large transaction to occur, then a fund will probably take several months to weed out what they do not want and eventually make its way to us.

Secondly, we are not sure if there will be a second wave and more shutdowns etc. while many think there won’t be, it’s another uncertainty. Many are waiting out the rest of 2020 to see how things shake out.

also for a fund, If you are buying paper which has potential limitations on FC, you will bid conservatively in case it were to be extended, banks will want top dollar so there will be conflict in what pricing should be.

Chris Seveney · Answer

I am not in a waiting pattern but make sure what I acquire fits my criteria. The current legal situation is not holding me back as it may add a few months to a FC but I am factoring that into my pricing. I have put offers in on paperstac and have bought a few notes but most of the assets I acquire (approx. 30 in past two months were all from sellers I have built relationships with over the past three years - 29 from seller and 1 from paperstac).

I put in another 25 offers last week and hope to hear back this week as well.

Logan Hassinger · Answer

@Robert Harpster

While paperstac is a great source for one off’s or even a small pool purchase for what I call, retail investors (by no means do mean that in a derogatory way; simply referring to note investors note businesses ), it can’t be our only source.

I work with a few excellent brokers and directly with regional banks. I also occasionally buy from owner financiers as well. It’s takes many sources to run a note business/note fund.

To answer your question about pricing and inventory, I agree with @Jamie Bateman, as that has been our experience as well.  When this whole pandemic got started in March and widespread stay-at-home orders where put in place, my phone was ringing off the wall. However those phone calls rarely turned in to seeing some actual product because I alway make it a point to discuss pricing first (no sense in running through a few hundred notes and pricing is way off).  The sellers were too close off the heels of 90% of UPB or more on performing/scratch and dents. The nonperforming was being traded at 70-80%.  Still no margin in it.

If and when inventory with realistic pricing does pick up, I believe the timing is 12-18 months from now. It just takes time for these things to unfold. It’s not the stock market with massive shifts in a week or months time, hell even in a days time as was seen in March/April.

Andy Mirza · Answer

The shortest possible timeline to see COVID related paper is now. The only note traders trying to sell now are those that have to and they will sell all types of notes at various stages of FC, according to how they do business. Anything that's 60+ days behind falls into the category of COVID related. Not all borrowers will go the forbearance route and some will just let things go.

That's the tricky part. Right now, the market wants a 8-15% discount off of pre-COVID prices. What's the real price once you factor in each state's new restrictions on FC? We'll see.

As far as realistic timelines....I agree that we might start to see some of this by the end of the year. Maybe it'll be 1.5 years before we'll see significant numbers. By 2.5 years,  we'll have a good idea of the extent and will probably see the most COVID related product.

At the end of the day, though, we're all just guessing :)

Jamie Bateman · Answer

@Chris Seveney Any reason you say that, Chris? You think the hedge funds will buy up anything available from the banks first and then we'll see some assets available in 1.5 years+? I don't necessarily disagree, just wondering what your reasoning is.

Chris Seveney · Answer

I still think it will be a long while before we see any covid paper make its way through the secondary market. I would be surprised if we see any before 2022.

Andy Mirza · Answer

We're in capital raising mode for our current Fund and we'll be ready to buy at the beginning of August. We know of a big fund that's still selling but we don't know what pricing expectations are yet. Our two main trading partners aren't doing anything until things normalize even more.

The last of the states to re-open are opening courts and allowing foreclosures and evictions to resume. We expect things to get back to normal in those states within the next month or two.

Buyer pricing expectations are 8-15% less than they were pre-pandemic. If you don't need to sell, you're keeping your notes and waiting for the market to recover. If that pricing holds, we'll be in a great position to buy in August.

All of our NPNs had problems pre-pandemic and I expect that we'll still see the same severely delinquent paper that we did before.

It will be interesting to me when COVID related defaulted paper starts showing up. We'll have to do our DD and really dig into those. What if you can't foreclose or there are other restrictions on what you can and cannot do for loss mitigation? I assume that those additional considerations will affect the price that sellers can demand.

Note Activity - Buying or Waiting or Getting Out?

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